Mr. Kirby, 50, is a founder and the chairman of Green Street Advisors, an independent research and consulting firm that tracks the commercial real estate industry, with an emphasis on real estate investment trusts, or REITs, public companies that disburse most of their income as dividends. Mr. Kirby, who started the company in 1985, also serves as its research director.
Q How did the firm get started?
A I was 24 — straight out of University of Chicago business school — when I started the company with Jon Fosheim. He stayed for 20 years, then went off to start up a hedge fund. We started Green Street to do something a little different than what it now does: we were looking for opportunities in the junkyard, basically distressed properties.
We came across a couple of REITs that bankers were having problems with, and did our own due diligence. We came to the conclusion, in the case of one, that the company was worth less than zero. Then we came across a research report by a major Wall Street house that said this company was a $12 stock and that they just did an equity offering. That’s when the light bulb went on over our heads that a) nobody really understood the real estate in REITs; and b) the conflicts were pretty egregious.
Q How have REITs changed since you began tracking them?
A REITs were a $10 billion niche; now it’s about $350 billion. We follow over 90 percent of the market cap of U.S. REITs and now over 50 percent of the market cap in European REITs. Our business grows as the industry grows.
Q What is your assessment of the domestic REIT market?
A REITs had a great 2.5-year run: they delivered total returns of 27 percent two years ago and 20 percent last year, and this year they’re up something like 10 percent year to date. That’s the good news. The bad news is, that came on the heels of a 75 percent drop.
Q So what does this mean for average investors?
A Most people should be 5 to 10 percent in real estate; it’s an asset class that tends to zig when other things zag, and so it’s a good diversifier. To the investor already in REITs, it’s probably not a bad idea to be on the lighter side of allocation. Today we sort of view the valuations as on the rich side.
Q Who are your main clients?
A Generally mutual fund managers or pension fund advisers.
Q Are you bullish on any commercial property sectors now?
A The one sector that’s just on fire is apartments, and this is true in New York and nationwide. So what’s happened in apartment land is, the fundamentals didn’t weaken as much as in the other sectors. During the downturn, they were supported by the fact that the homeownership rate declined through the recession, creating more demand for apartments. Meanwhile, there’s been very little construction in the last few years, and really there won’t be any in another year or two. That has been sort of a perfect storm for apartments.
Q How is the New York office market faring?
A New York is doing better right now from a fundamental and a valuation perspective. We didn’t see anything near the layoffs we feared we might during the downturn, and there is increasing demand. You’re also seeing rents jump up.
If you’re buying in New York today, you really have to be pretty bullish that New York is always going to be the dominant place that attracts the best and the brightest of whatever industry, which has certainly been true over the last 20 years.
Q Do you have any numbers?
A During the trough in early- to mid-’09, Manhattan office values went down over 50 percent, and since then they’ve rallied up 78 percent from the trough. So today we’re 15 to 20 percent lower than the ’07 peak.
Q A couple of years ago it was difficult even to put a value on many properties.
A Right, it was pretty much a guessing game. The market is pretty liquid now. Pricing among higher-quality property has really skyrocketed in the past two years. I think that’s going to level off because we’re going to see a lot more stuff get put up for sale.
Q That’s good for all the cash-ready institutions, like REITs, waiting on the sidelines to buy.
A In the last year they’ve had trouble finding enough stuff to buy. A lot of REITs are well positioned to take advantage of any buying opportunities. I don’t think they’re going to be necessarily distressed sales. There will be bidding contests.
(credit,v, marino: square feet, nyt)